Prices holding on light volumes; Emerging markets waits for Fed; Petrobras prices $1 billion

By Aaron Hochman-Zimmerman

New York, Oct. 30 - Emerging markets spent a day on the sidelines waiting and hoping for the Federal Reserve Bank to make a rate cut.

In trading, volumes were light and prices mostly unchanged. Even high-beta Argentina made no drastic moves and saw its discount notes due 2033 drop only 0.2.

In the primary, the day's only action was from Brazil's Petroleo Brasileiro SA, which managed to price a $1 billion deal.

Headlines were creeping up as a concern again as market watchers woke up to more losses from major banks. Subprime investments handed UBS its first quarterly loss in five years, although the Swiss bank claims it will show profits in the fourth quarter.

Writedowns totaling over $4 billion left UBS with a net loss of about $710 million.

Also, U.S. Treasury secretary Henry Paulson said the housing crisis in the United States is poised to continue while at a conference in New Delhi. Still, the U.S. economy is strong enough to grow through the problems, he said.

Unnerving headlines from major banks and the tumbling dollar will weigh on the Federal Reserve Board as it prepares to deliver its decision about a rate cut on Wednesday.

The consensus view amongst many investors is still for a 25 basis point rate reduction, although doubts are rising.

"Part of me is a little bit hesitant," a syndicate official said.

"Clearly, we'll see tomorrow if ol' Bernanke is dressed up for trick or treat," he said.

"They're somewhat boxed into a corner," a trader said about the Federal Reserve Board.

Many of the recent headlines point towards the need for a cut, he said, but the accompanying commentary will be what truly determines whether or not the market receives a bounce.

Volatility was up mildly as investors waited on the Fed. The VIX index added 1.20 to close at 21.07. The index is the accepted measure of market volatility.

Petrobras prices $1 billion

Activity in the primary slowed after Monday's rush to add new deals to the calendar.

Still $1 billion came through the pipeline from Petroleo Brasileiro. It priced 10-year senior unsecured notes (Baa1/BBB-/BBB-) at 98.612 to yield 6.059% with a spread of Treasuries plus 167 basis points.

The deal priced on top of talk, which had been tightened from the Treasuries plus 170 bps area.

The registered notes will mature on March 1, 2018.

Citigroup and UBS will act as bookrunners for the Sao Paulo, Brazil-based oil producer.

"Petrobras is a pretty good trade," a syndicate official said.

Europe's eyes on Fed

In trading, levels in emerging Europe continued to hold on light volumes before the Fed's rate cut decision on Wednesday.

Russia surprised the west Tuesday by announcing the presence of foreign minister Sergei Lavrov in Tehran for talks with the Iranian government. The meeting comes days after president Vladimir Putin met with European Union leaders to discuss international affairs, economic and energy supply issues.

The benchmark Russian sovereigns due 2030 were spotted unchanged at 112.875.

In Turkey, the country avoided headlines, but its conflict with the Iraqi government over the presence of the Kurdistan Workers Party (PKK) in northern Iraq persists.

The conflict has created heartburn for politicians and diplomats, but investors have seen little effect on Turkey's government bonds.

The sovereign due 2030 was seen up 0.125 to trade at 158.125.

Even the price of oil which may have been influenced by the swelling conflict has dropped back to near $90 per barrel.

LatAm holding gains

Latin America was still feeling some of the effects of the Cristina Fernandez de Kirchner-inspired jump in prices from Monday's trading.

Volumes were light, but still higher than what was seen in Europe or Asia.

Argentina picked up 4 points Monday, which was the first day of trading after the election of Cristina Kirchner to the presidency.

In an interview with the BBC, Cristina Kirchner defended outgoing president Nestor Kirchner's inflation policy. By the government's official count, inflation is under 9% per year, but many think that the true figure is closer to 20%.

Cristina Kirchner's domestic policies include improving unemployment and poverty, but she also has designs to improve Argentina's standing in the world economy. She intends to strengthen the regional trading bloc, Mercosur, which includes Brazil, Paraguay, Uruguay and Argentina. Venezuela has been invited to join the group.

Argentina's high-beta 8.28% bonds due 2033 generally held on to Monday's gains, dipping by just 0.2 to trade at 99.10.

Brazil saw no change to its bonds due 2037 on the day as investors were interested to see the market's reaction to the Federal Reserve. The issues were flat at 115.75.

Venezuela, which had seen gains in large part due to rising oil prices, also held firm at Monday's prices. The sovereigns due 2027 were quoted at 109.25.

Asia light volume, mixed tone

Sentiment was rocky in Asian trading, where the market was "treading water a bit," a trader said, although "CDS is pretty firm.

"Sovereigns remain pretty well bid," he added.

The Philippines bonds due 2030 dropped just 0.25 to trade at 134.25 bid, 134.75 offered.

In Indonesia the sovereigns due 2017 stood still once again at 115.50 bid, 115.875 offered.

Meanwhile, in Pakistan a suicide bomber killed approximately seven people and injured many others as the bomb, likely targeted at president Pervez Musharraf, exploded outside a Pakistani army headquarters building in the garrison city of Rawalpindi. Musharraf was unharmed by the suspected Islamic militant.

Despite the violence, the renewed hopes for greater democracy in Pakistan have helped the country's issues, although in Tuesday's trading the country's government bonds due 2017 fell 1.5 to finish at 90.5 bid, 92.5 offered.

The trader felt that the mixed sentiment which has taken hold of the market may be partly stemming from the banking sector.

"Banks globally remain under a fair amount of pressure," he said.

Even the banks which have held up through the credit crunch are subject to the unfriendly environment, he said.

The market has also provided new supply, but "there hasn't been fantastic performance," he said.

© 2015 Prospect News.
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